Barrick Gold Corp. was off to a dismal start on Thursday morning. Its share price slipped nearly 8 per cent in early trading, and the slide had nothing to do with the price of gold, which actually rose slightly.
Instead, investors were confronted with what has been a far bigger problem facing Barrick these days: Costs. And Barrick isn't alone here. Surging production costs have affected most commodity producers, cutting into profitability and weighing on share prices.
Indeed, costs are a key reason why the share prices of commodity producers have been lagging their underlying commodities – encouraging investors to look beyond the stock market and instead focus on exchange traded funds that give them direct exposure to the commodities themselves.
In the case of Barrick, the latest cost overruns are associated with its Pascua-Lama project in South America. The mine is promised to be the world's largest and lowest-cost gold mine when it becomes operational, yet delays and rising labour costs have made investors far from enthusiastic about the project.
My colleague Pav Jordan reported that "the massive project in the southern Andes mountain range between Chile and Argentina is now expected to cost as much as $8.5-billion (U.S) to build as it targets first production in the middle of 2014. That is even more than the approximately $8-billion Barrick estimated Pascua-Lama would cost to develop in July."
Barrick's share price on Thursday fell to $37.30 in Toronto, or lower than where it was five years ago – even as the price of gold has risen 120 per cent over the same period. This disparity between gold price and stock price has hurt more than investors: Aaron Regent lost his job as chief executive earlier this year, and the languishing share price was seen one reason for his sudden departure.
But Barrick is by no means alone. The NYSE Arca Gold Bugs index, comprised of major gold producers throughout the world, has risen less than 25 per cent over the past five years, also drastically underperforming gold itself. On Thursday, the index fell 1.9 per cent.
In its 2012 annual gold price report, PWC pointed to rival investment products – the SPDR Gold Trust ETF is the most popular – as a key reason why gold stocks have underperformed gold. Simply put, "the availability of a wide range of financial products that allow one to invest in gold, such as exchange traded funds (ETFs), have changed the game for gold mining executives," PWC said in its report.
To fight back, gold producers have been trying to entice investors with bigger dividends, since gold and gold ETFs pay nothing. Among Canadian producers, Barrick, Goldcorp Inc. Yamana Gold Inc. and Alamos Gold Inc. have all raised their dividends aggressively.
However, the yields – or the dividend payouts relative to share prices – are still relatively low, ranging between 1 per cent and 2 per cent. Perhaps that's not enough to divert attention away from the alternatives. Or, more likely, it doesn't compensate for the impact of rising costs.
David Berman